Number 2: Stop giving private businesses government handouts

Victor Joecks

In the spirit of the 12 Days of Christmas, I’m going to be listing my 12 favorite Write on Nevada posts from 2011. I’ll share my favorite post tomorrow. We love to get your feedback, so please leave your thoughts in the comments. Here’s post number 2.


Thoughts on this post: One of the biggest misconceptions about about believers in free enterprise in general and NPRI in particular is that we always support “big business.”

Nope. Believers in free enterprise support freedom in the marketplace, which means that individuals – not government officials, should decide who wins and who loses. If individuals choose a small business, great. If individuals choose a large business, great. If individuals choose a large business for a while and then decide they like another business better, great. There will always be winners and losers, but they should be selected by individuals, not government bureaucrats.

Always having to compete for business is difficult and risky. And so some businessman decide to try and use the power of government as a shortcut to profitability. One of their favorite excuses is that business subsidies are needed to spur “economic development.” As this post shows, that is garbage.

Stop giving private businesses government handouts

Whether politicians call it “business development,” “economic diversification” or a “venture capital fund,” handing out government – excuse me – taxpayer money to favored companies is corporate welfare and the very worst of crony capitalism.

Then why are politicians, from Gov. Brian Sandoval, Speaker John Oceguera, Senate Majority Leader Steven Horsford, Henderson Mayor Andy Hafen to even Texas Gov. Rick Perry, so eager to do it?

First, it looks good – for them! Not for taxpayers, not for the vast majority of the unemployed, not for the businesses (and their employees) who have their taxes used to subsidize their competitors. Corporate welfare looks good for politicians.

Why? Because they can put out press releases saying “they,” your elected representatives, have created jobs, and “they” are fixing the biggest problem facing you and your community. Now, don’t you want to vote for them again?

Second, when the jobs never materialize, politicians often aren’t held responsible. And businesses receiving government largesse go belly up or produce significantly fewer jobs than advertised with astonishing regularity.

How about the $1.5 million lost when a company subsidized by Texas – authorized by Perry – went belly up? Gone.

ThromboVision, Inc., a medical imaging company, was also the recipient of an award from the Emerging Technology Fund: It received $1.5 million in 2007. Charles Tate, a major Perry contributor, served as the chairman of a state committee that reviewed ThromboVision’s application for state funding, and Mr. Tate voted to give ThromboVision the public money. …

According to a Texas state auditor’s report, ThromboVision failed to submit required annual reports to the fund from 2008 through 2010, when the company went bankrupt. The report noted the tech fund’s managers were “unaware of ThromboVision, Inc.’s bankruptcy until after the bankruptcy had been reported in a newspaper.”

How about the $58 million Massachusetts gave Evergreen Solar, which recently declared bankruptcy? Gone.

How about when Nevada spent $12 million to “create” five green jobs? Wasted.

Third, there’s a significant misunderstanding in this country (among politicians and the public) about what or, more appropriately, who creates jobs.

Sure, politicians can create short-term jobs and bubble expansions by taking wealth away from citizens and manipulating interest rates, but neither those jobs nor the economic bubbles are sustainable. Exhibit A is the epic failure of the stimulus. Exhibit B is the high number of failed government interventions during the Great Depression.

Long-term economic growth, the kind that made America the richest country in the history of the world, where even 97.7 percent of “poor” Americas have televisions, comes from entrepreneurs – individuals acting in their self interest.

How does a system, rooted in individuals acting in their own best interests, benefit society in general and not just those individuals? Simple. In a free-market system, you earn money by making others better off.

Want to be rich? No problem. Just invent something to make other people’s lives better off. Want to run a successful company? Meet your customers’ needs at a competitive price. Want to put Wal-Mart out of business? Build a better store – “better” being determined by individuals making decisions about what’s best for them.

The beauty of the free market is that individuals are incentivized to meet the needs of others. These free exchanges of money for goods or services leave both sides better off and are the basis for wealth creation.

A simple example: Imagine going into a McDonald’s and ordering a Big Mac. You value the Big Mac more than the money it cost and McDonald’s values your money more than the Big Mac. That type of win-win transaction – freely agreed to by both parties – is how wealth (not money, but wealth) is created.

Contrast that with government-directed “growth.” Instead of spending money on satisfying customers’ needs, businesses that want government handouts spend money lobbying and contributing to elected officials. This shifts the power from the consumer to the government. (There’s a host of other reasons this negatively impacts the economy, the biggest being that government officials suffer from both an incentive and information problem, but that’s a whole other issue.)

Indeed, the great success Texas had creating jobs while Perry was governor isn’t about what Perry did. As noted above, the times Perry “did” things to grow the economy, he often failed.

Perry’s great success in Texas is what he didn’t do. In general, he didn’t raise taxes, he didn’t grow government, he didn’t increase job-killing regulations, he didn’t pass ObamaCare. Perry’s success is that he got out of the way of entrepreneurs, and they built businesses while pursuing their own individual self interests.

Entrepreneurs are ultimately responsible for job growth in Texas or in any other state. The great achievement of a politician, then, is simply to create a low and uniform tax and regulatory burden and get out of the way.

And giving money to favored companies is the very definition of getting in the way. Those who care about long-term job growth, as opposed to short-term photo-ops, should oppose government giving tax-dollar subsidies to private businesses every chance they get.